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Other Voices

Unsettled Monopoly

By

Jeffrey L. Smith

Dec. 10, 2001 12:01 a.m. ET

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Microsoft has been convicted of monopolizing the personal computer operating-system market (Windows), and of using this monopoly illegally to extend its market power into related software -- specifically computer browsers (Explorer). Even before lawyers and judges caught on, it had long been obvious to computer professionals that the basic business strategy of Bill Gates and
Microsoft
includes aggressive exercise of market power afforded by the Windows monopoly. This power is used to harass and to drive competitors out of business. It is used illegally to extend monopoly power into related lucrative software markets.

These facts have now been proven in court and upheld on appeal.

Microsoft extracts monopoly profits from consumers of these products through high prices, resulting in fabulously wealthy Microsoft shareholders.

While Microsoft products provide very significant benefits to their users, this is irrelevant to the charge of illegal monopolization. Competitive markets would provide significantly greater consumer benefits in terms of choice, software functionality and much lower prices.

Because government regulation is often inefficient, poorly designed or corrupted -- by nepotism, for example -- many have concluded that government enforcement of antitrust laws is counterproductive. Conversely, private markets are lauded for their efficiency -- governments should just get out of the way.

However, this is a na&iuml;ve and incorrect view of private markets. Private markets are efficient and effective only if they are competitive. And not all markets are naturally competitive -- they fail to be competitive for a variety of well- understood reasons related to the characteristics of the products.

For example, markets for control of pollution usually do not even exist without government intervention. Exercise of monopoly power, often through illegal cartels, is another common source of market failure.

Only government has the ability to correct private-market failures. When these failures are significant, government remedy can provide important consumer benefits. This is the essence of antitrust laws, and is an essential government function for the promotion of competition, and through it, consumer welfare.

Bill Gates and Microsoft refuse to admit or understand that their basic business strategy is illegal. Microsoft will not voluntarily give up its existing monopolies nor change its illegal business practices.

In fact, even though it lost in court, Microsoft has, in effect, almost defeated the government through the negotiation of a settlement that protects its basic monopoly power. In this settlement Microsoft does not even admit its guilt. The settlement has been accepted by the federal government and by half of the states that won the conviction of Microsoft.

It is clear that the Bush Administration does not understand the damage done to business productivity and consumers by the Microsoft monopoly. It seems likely that the cozy relationship between our present administration and big business will result in weak pursuit of antitrust enforcement across the board.

Microsoft is exerting tremendous pressure, using its huge financial resources, to force the remaining states to settle. Many politicians have only a vague understanding of markets for software and computers and are easily swayed by the Microsoft PR campaign. Microsoft is using state legislators to attack the use of state funds to pursue an adequate legal remedy. If Microsoft can pressure legislatures to remove funds from the state attorneys-general, it can force a settlement on its terms.

A negotiated settlement cannot break the Microsoft stranglehold on PC software. The judiciary must impose a solution. However, neither the judiciary nor most commentators have penetrated the problem sufficiently to construct adequate and fair remedies for consumers and Microsoft competitors.

Breaking up Microsoft into pieces, each of which maintains monopoly power over important PC software, would not address the basic problem -- Microsoft's business practices. Nor does it provide compensation to consumers or businesses harmed by the monopolistic practices of Microsoft.

With books or other publications, most of the cost is incurred in writing and producing them; printing additional copies is inexpensive. Similarly, software costs are almost entirely development costs, because downloading electronically or "producing" copies of existing software are essentially free.

Just as writers enjoy a "monopoly" on the sale of their books, granted by government and secured through copyright, software writers are afforded the same exclusive rights to software they develop. Thus, the owners of software and other publications are afforded legal protection to distribute and sell exclusively their products through copyright protection. It is not the monopoly, per se, that is illegal. It is using that monopoly to control other markets that is enjoined.

Breaking up Microsoft does not address this issue because it leaves all the Microsoft monopolies, most importantly the Windows monopoly, intact.

Copyright is a privilege granted and protected by law. When that privilege is abused and employed in illegal activity it can and should be forfeited.

An appropriate remedy would have the following characteristics: (1) it would end the existing Microsoft monopolies by establishing competitive markets for PC operating systems, Office products, and other PC software; (2) it will prevent future monopolization of PC or other software by Microsoft or others; and, (3) it will prevent further profiteering by Microsoft on products that have been used to extract monopoly profits from businesses and consumers.

The following two simple strategies will achieve these goals: (1) prohibit Microsoft from selling any software that has been found to be employed in an illegal monopoly -- all existing versions of Windows, including XP, and the Explorer browser and possibly Office products (2) force Microsoft to license at no cost the Windows source code and the source code from other illegally monopolized software to all US software developers, PC makers and other US businesses. These developers would be free to modify and to sell or give away their own versions of Windows.

Microsoft would be free to compete in these markets by developing and selling future versions of Windows and other software.

These simple remedies will have a powerful effect on Microsoft and the PC market. An explosion of new, improved and customized versions of Windows can be expected, as PC makers and software developers simplify and specialize Windows. We can anticipate vast improvements in Windows' speed, ease of use, flexibility and stability -- no more crashes and reboots!

Windows will be specialized by developers to meet particular needs. New standards organizations will arise to promote Windows compatibility and data-exchange standards. Competition will result in much lower prices for the improved products compared with the exorbitant monopoly rents collected by Microsoft today, dramatically lowering the cost and prices of new PCs.

Thus, both business and consumers will be at least partly compensated for the extremely destructive monopolistic behavior of Microsoft. Competitive markets for PC software will be created, preventing Microsoft from future exercise of market power. Then Microsoft will simply be one of many competitors in the PC software business.

Jeffrey L. Smith has a Ph.D. in economics from the University of Chicago, and has held a variety of software-development and computer-management positions in government and academia. However, he has never worked for Microsoft or any of its competitors.

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